GST Margin Scheme: Why All Property Investors Need to Know About ThisKan Huang
Do you qualify to use the GST margin scheme on the sale of your property?
While it’s generally not likely that you’ll need to pay GST on the sale of your private residence, for many Australian property investors, buying and selling property is their business.
So, as a property investor, not only will you have to consider stamp duty, land tax and income tax implications, but you’ll have to consider your GST implications too.
Fortunately, the ATO allows investors in certain instances to use the GST margin scheme as an alternative way of calculating the GST you’re liable to pay when you sell your investment property.
Here’s why all property investors should know about the GST margin scheme.
Paying GST on the Sale of Your Investment Property
For contextual purposes, it’s worth noting that you have to register for GST if your business’ turnover exceeds the $75,000 GST threshold.
According to the Australian Tax Office (ATO), buying and selling property is considered to be a business. So, most businesses that deal in property must have an Australian Business Number (ABN) and be registered for GST.
Even with a one-off transaction, you may still be required to register for GST because carrying out the transaction may constitute you as an enterprise.
Should you be registered for GST, you’ll only have to pay GST on the sale of a residential property if it’s a new property. The sale of a second-hand property doesn’t trigger GST liability.
A new residential property is defined as a property that has not previously been sold as residential premises. It includes property that has been substantially renovated or built to replace a demolished property.
Vacant land, however, is not a residential premise. So, if you’re selling land, it may incur GST.
If you plan to sell the property in either of these instances, you will usually be liable to charge GST of 10% on the sale and pay this amount to the ATO. You should therefore allow for GST in the price of your property.
If you’re eligible, you could use the GST margin scheme to calculate the GST on your sale.
What Is the GST Margin Scheme?
Under the GST margin scheme, the GST payable on the sale of your property is one-eleventh of the margin for your sale.
The sales margin is the selling price less the amount you originally purchased the property for.
Lucy purchased a property for $830,000 (GST exclusive) and completed substantial renovations before reselling it for $1.6 million (GST exclusive).
If she doesn’t apply the GST margin scheme, she would have to pay 10% on the $1.6 million, which is $160,000.
Under the GST margin scheme, however, Lucy will pay one-eleventh of the $770,000 in profit ($1.6 million – $900,000), which amounts to $70,000.
So, the GST margin scheme reduces the amount of GST that would generally be payable on sales of a new property.
According to the ATO, the GST margin scheme is not an automatic concession, and the sale must be eligible for it to be applied.
When Are You Eligible to Apply the Margin Scheme?
The eligibility criteria to use the margin scheme dependent on:
- when the property was initially purchased, and
- how GST was applied at the time of the original purchase.
When Was the Property Originally Purchased?
If you purchased a property before 1 July 2000, you’d be eligible to apply the margin scheme to calculate the GST on your sale. This is because the property was not subject to GST before that date.
How Was GST Applied At the Time Of the Original Purchase?
If your property was purchased after 1 July 2000, you may only use the margin scheme on the subsequent sale if one of the following factors apply:
- the original seller of the property wasn’t registered for GST;
- the property was purchased as an existing residential premise;
- the original seller sold the property as a GST-free supply and was eligible to use the margin scheme; or
- the seller sold the property and applied the margin scheme at that time.
When Can’t You Use the GST Margin Scheme?
You won’t be eligible to utilise the GST margin scheme in the following circumstances:
- where a taxable property was purchased, and the GST was calculated without using the GST margin scheme (this is because you would have paid GST on the purchase and then been entitled to a tax credit for the payment of that GST).
- where you got given the property through inheritance and the deceased individual had bought the property without it meeting the margin scheme eligibility criteria;
- where you acquired the property from the operator of a joint venture in which you were a participant and the operator had obtained ownership in a manner that wasn’t eligible for the margin scheme; and
- where you acquired the property as a GST-free supply of a going concern.
What is a GST-Free Supply of Going Concern?
A ‘going concern’ for the purposes of GST refers to an enterprise’s ability to continue functioning after the date of sale.
So, if you sell farmland for example, and the farm continues to operate as it did before the sale, then the sale of that farm is deemed to be the supply of a ‘going concern’, then the sale would be exempt from GST.
Other GST Margin Scheme Considerations
On 1 July 2018, the ATO introduced some changes to the GST margin scheme laws.
Previously the GST-registered seller (or property developer) would include the GST payment in the contract price, and the purchaser would pay the GST to the seller at settlement. The seller would then be responsible for transferring the GST to the ATO.
Now, however, the purchaser is required to withhold an amount from the contract price and pay that amount directly to the ATO. The amount that the purchaser must withhold is 7% of the contract price.
According to the ATO, If you are dealing with property (for example, you buy, sell, lease or develop), you may be considered to be conducting an enterprise or business.
If this is the case and your turnover from these activities is more than the GST registration threshold, you will be required to register for GST.
The GST margin scheme is a way of working out the GST you must pay when you pay the taxable supply of property as part of your business.
The sale margin is the difference between the sale price and the amount you paid to purchase the property. If you’re eligible to claim the GST margin scheme, then you would calculate your GST liability on that difference.
The GST margin scheme eligibility requirements can be tricky, so if you’re unsure whether you’re required to pay GST or qualify for the GST margin scheme, you should consult a property tax specialist.
At Property Tax Specialists, we have decades of experience navigating the GST rules inside and out, so you don’t have to. We make sure your investment property portfolio complies with regulations and meets the necessary reporting obligations.
To discuss any matter relating to GST or to arrange your affairs for asset protection and minimum tax, get in touch today.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.